The Tenant Tax is Coming

What is Section 24

In the Summer budget 2016, George Osbourn announced the introduction of The Finance Act (No2) 2015, Section 24 of this act impacts ALL individual landlords who have mortgages will from April 2017  this will restrict mortgage interest expense deductions for private landlords to the basic rate of tax

The hugely important and Generally Accepted Accounting Principle (GAAP), where INCOME minus COSTS equals PROFIT, will no longer apply to individual buy-to-let landlords with finance costs.

put, Section 24 will mean that most landlords will have to pay extra tax of 20% or more of their annual mortgage interest and other finance costs. The tax they pay may be greater than their real profit, leaving them with a rental loss and a cash shortfall.

And it’s likely to move vast numbers of landlords into the higher rate tax bracket, while simultaneously losing them their tax credits and personal tax allowance.

On 6^th October 2016, Cherie Blair QC represented landlords in The Royal Courts of Justice to request the law be overturned

----The hearing failed

Landlords have already been hit this year by the removal of the annual wear and tear allowance, which allowed landlords to claim back the cost of items they had to replace in a furnished property

Impact on tenants

The impact will be devastating for the Private Rented Sector (PRS) The National Landlord Association estimates this law will impact over 314,000 landlords with an estimated 630,000 properties being effected.

Smith Williamson Specialist accountants have calculated that landlords would need to increase rents by at least 5% to counter the impact of S24

The increase in rents will effect all tenants, both employed and in receipt of benefits, however it is unlikely that tenants will be able to afford these increases. Those working will not see a wage increase

DWP Quarterly Benefits Summary - At August 2015, state there were 4.79 million recipients of Housing Benefit, of whom almost three-quarters were aged under 65. The average weekly amount of Housing Benefit was £95.30.

86.8% of the 1.53 million Private Sector Housing Benefit recipients were receiving the Local Housing Allowance.

All of these households have the potential to lose their homes because they will not be able to afford the expected rent increases.

Social Impact

Millions of people face the very real likelihood of being made homeless if rents are increased, the main reason for this is Housing Benefit will not be raised in line with this mass increase, Housing benefit or LHA is only calculated once a year on 15^th January by Valuations Office Agency VOA, these calculations are based on the 30^th percentile of rents in the Broad Rental Market Arear BRMA and the existing LHA rate.

Tenants who have their rent increased in April 2017, will not see an increase in their housing benefit until at least April 2018, resulting in many being evicted for rent arrears, an issue that will bring its own problems as tenants will find their credit impacted as will as having a ‘black mark’ against them for leaving a previous property in arrears

Although this new regulation does not effect landlords who do not have a mortgage or are incorporated in someway, it is extremely unlikely that these landlords will be happy to sit back an accept lower market rents while others enjoy increases, the obvious knock on effect is all landlords will increase rents to set a new high market rate, which will be completely unaffordable to most, even if they are in full time employment.

This will result in many homes sitting empty it has priced people out of the market and a huge increase in homelessness.

So what is the answer?

If only it was that simple… the sensible thing to happen would be to bring S24 in to force in April 2017 but only for New BTL properties from that date on, this way landlords can go into buying a property with all the facts and their eyes open.

At present, many existing landlords will be blindsided by this new legislation and in fact could risk losing their own homes as their personal mortgage may rely on rental income and a huge tax bill could push many owners into debt.